The Nevada or Delaware Limited Liability Company (LLC) for International Business is the worst choice for a privately owned business. Doing business in countries that have a tax treaty with the U.S. requires the use of a corporation. In some of the newer treaties a partnership gets some tax advantaged if you can get the IRS to issue a tax treaty certificate.
The domestic limited liability company is an American entity. It is not classified as a corporation for international business or for domestic business. Making matters more awkward, the LLC tax classification does not fit into the concepts found in tax treaties.
The Nevada or Delaware Limited Liability Company (LLC) for International Business May Not Protect You form a Creditor.
Since other countries do not have the U.S. tax concept of the LLC, you may not get protection for a creditor.
And there is more bad news. For example, while the Dutch has a fantastic tax treaty with the United States, the American small business owner can fail to get all of the intended tax benefits. The major tax treaty benefit is avoidance of paying tax in the foreign country and not filing a tax return with the foreign government.
Here is the international tax problem with the LLC
The permanent establish article does not reference a limited liability company. The small business owner is in a risky position. If the/she can lose the U.S. foreign tax credit if they fail to pay the foreign country’s tax when the tax is due. For example, you are based in the Netherlands and you decide not to file a dutch income tax return for the LLC for year 2017,
In 2021, the Dutch audit you. Since you never filed a return, they can charge you the tax. In 2023, you make the decision that the legal fees of fighting the tax are too expensive. So, you pay the tax. Since the U.S. taxable year was 2017, you are six years late in claiming the foreign tax credit.
You end up paying tax twice. First, to the IRS in 2017 on the Dutch income. Then in 2023, you pay the tax a second time to the Dutch government.
The Best Small Business International Tax Structure and Entity
The United States Department of Treasury decided to help the small business owner obtain the maximum tax benefits by allowing you to treat your foreign corporation as a domestic corporation. This process is known as a domestication. As a domestic corporation, the American can elect taxation as a subchapter S corporation.
Tax treaties give corporations permament establishment protection. If you do pay a foreign income tax, the IRS foreign tax credit rules apply to a subchapter S corporation. The foreign tax credit allows you to offset your IRS taxes with the tax you pay to a foreign government.
Below is a short video on the domesticated foreign corporation. While the video is about Mexico, the same rules apply to Europe.